Market movers today
- Brexit optimism is rising. An announcement that the House of Commons will sit on Monday and Tuesday next week is considered a big signal that they are closing in on a deal.
- We think the Federal Reserve will stick to its game plan without any major changes.
- US retail sales will shed some light on whether the sharp increases in COVID-19 cases and new restrictions across the country have led to a setback in the consumption recovery. Today, we also get flash PMIs for the US and the euro area.
The 60 second overview
Positive vaccine news. US FDA’s report on the Moderna vaccine ahead of the advisory board meeting on Thursday was released yesterday. Overall, the report finds Moderna’s vaccine both safe and effective. We expect the advisory board to vote in favour of the vaccine on Thursday meaning that the vaccine can get emergency use authorisation on Saturday (if the FDA follows the same playbook as for the Pfizer vaccine last week). Also, we now know that the EU EMA will meet on Monday 21 December to discuss the Pfizer vaccine, which we expect to get approved in the EU before Christmas (previously we only knew a decision would be taken before 29 December).
Renewed Brexit optimism. Yesterday, a BBC political reporter tweeted ‘Big buzz in the last hour among Tory MPs that the UK is heading towards a Brexit deal with the EU. Eurosceptics being reassured they will be happy’. So perhaps the recent hawkish comments from both the EU and the UK were just fuss about nothing after all? Normally, UK political reporters have lots of great insights into the UK political process but let’s see over the coming days. An announcement that the House of Commons will sit on Monday and Tuesday next week is considered a big signal that they are closing in on a deal. EUR/GBP moved lower on the tweet.
EU and US PMIs. We get flash PMIs today for the US and the euro area. Consensus forecasts are for a small dip lower in PMI levels. However, the manufacturing PMIs need to disappoint quite a bit to change the market narrative and markets will likely look through any weakness as temporary and fixable by rolling out vaccines early next year.
Fed. We think the Federal Reserve will stick to its game plan without any major changes. We may see the Fed changing its QE forward-guidance to outcome-based forward guidance but we think the Fed will continue buying at current pace for some time. The fact that breakeven inflation expectations continues to move higher, which is the main reason why the US yield curve has steepened, means that there is little pressure for the Fed to do much. Risk is, however, that it will do a ‘twist’ by buying US Treasuries with longer maturities, which is likely to lead to even lower US real rates.
Equities. Risk appetite soared yesterday, sending equities to a new all-time high (MSCI world). Cyclicals outperformed defensives by a huge margin not least in Europe where the Auto & Components sector rose 3%. In US all sectors higher but still with a cyclical leadership. The positive sentiment continuing this morning with Asian markets in green. US futures are flat while the European ones are slightly higher.
FI. Yesterday’s rather uneventful trading session ended with a 0.5-1bp sell-off across jurisdictions and maturities in core EGB space, with spread tightening in semi-core and periphery. The BTPs-Bund spread tightened another 3bp to stand at 113bp.
FX. EUR/SEK finished a quiet day somewhat lower, edging toward the lower end of last week’s 10.15-10.30 interval. EUR/NOK ended the day nearly where it started above 10.21. EUR/GBP broke below 0.91 yesterday on renewed Brexit optimism.
Credit. While iTraxx Xover and Main tightened 10bp and 1bp, respectively, demand for cash bonds was less upbeat with HY widening approximately 2bp and IG around 1bp.
